I haven’t written anything on Russia lately, being absorbed (obsessed?) with all things clearing, so I need to do something to stir up the natives in SWP-land;-)
There has been little concrete news to write about. The odd constitutional amendment Kabuki dance continues, but there’s little more to say about it. The Russian central bank has loosened the ruble band a bit further, but is evidently still defending the ruble–effectively giving speculators a free put that will pay off when the bank cries uncle, as it inevitably must. This is a foolish economic policy dictated by political considerations; if rapidly deteriorating fundamentals justify a drop in the ruble, let it drop rather than throw away (I cleaned that up) hard won reserves in an ultimately futile defense of an overvalued currency. The only conceivable reason for engaging in this policy is that Putin has staked his reputation on the ruble and avoiding another 1998-esque collapse, and that relatedly, a rapid drop would give the lie to Putin’s and Medvedev’s public expressions of confidence. Timothy Post and Da Russophile are sanguine that the Russian people will not turn on the government out of anger over the economic situation, but its actions suggest that Putin and Medvedev are not quite so confident.
Speaking of deteriorating fundamentals, oil sold off sharply today after a nice rally yesterday. Urals Med was quoted at $45.86 in European trading today. Brent has sold off some since that price was quoted, so the current price of Urals is probably south of that number. $45.86 ain’t $40, but it’s a long way from where the price needs to be to stabilize the Russian economy.
The most interesting news is this Reuters report that the government has decided to “delay” electricity pricing reform. A long article in the Moscow Times last week suggested that such a move was in the offing. Russia had spun off its electricity generators from state monopoly UES, but prices are still regulated at very low levels that make it completely uneconomical to make desperately needed investments. The next step of the restructuring plan would have raised these prices to allow grid operators to earn a rate of return sufficient to attract new capital. Allowing generators to sell at higher prices was essential to attracting desperately needed investment in new capacity.
The suspension of the pricing reform will likely be viewed as the government reneging on a commitment. This will make it even more difficult to attact the massive amounts of capital necessary to improve Russia’s decrepit power grid. (Though it should be noted that the financial crisis itself, and the problems in the real economy that will result from it, would undermine the investment case without the government’s piling on. But the reputational effect of changing the rules will exacerbate the difficulties in attracting capital, and will have effects well after the financial crisis abates.)
The decision making process was typically opaque, but it appears that major industrial interests, especially the big energy and mining companies pressured the government to keep prices low in order to support their suddenly struggling operations. This will further discourage investors, not just in electricity, but in all sectors, as it provides additional evidence (as if any was needed) that political calculations, rather than economics, drive key policy decisions. (And, in a pre-emptive exercise of “whataboutism,” I concur completely that this is going on the US and Europe too. Any bailout of the auto companies would be similarly egregious.)
The whole affair also shines a light on Russia’s vast investment needs. Electricity, roads, rails, health care, to name just the largest, are all in need of massive investments. The politicized capital allocation mechanism was not directing the oil windfall to where it was needed when energy prices were high, and now tens, and perhaps hundreds, of billions prudently accumulated when oil prices were high are being frittered away bailing out oligarchs to keep the stock they have pledged in collateral out of the hands of western banks, and propping up an overvalued ruble. This will have deleterious effects on Russia’s long term growth prospects.
Due to the closed nature of Russian governance, the silovikis‘ hands are invisible, but that’s not what Adam Smith had in mind. The hidden hand of the siloviki distorts the allocation of capital and discourages badly needed investment. Russia will not make the transition beyond Nigeria with snow and missiles until their malign influence is eliminated.